Drop-Ship or Don’t?Admin
Before we go into the pros and cons, first let’s make sure we’re on the same page about what drop-shipping entails. Wikipedia defines drop-shipping as a supply chain management method in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer. As in retail businesses, the majority of retailers make their profit on the difference between the wholesale and retail price. But in drop-shipping, some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer.
Now why do online retailers drop-ship in the first place? A business needs to source its supply from somewhere. Then it needs to store it, manage the inventory, deal with order fulfilments and shipping, and also build its brand and do the marketing. So instead, if online stores just do the latter bit and act as mediators for transactions, they essentially halve their problems! They simply transfer the order to the drop-shipper, who handles the inventory and logistics. And you get to tap into the supply chain without the burden of inventory.
But as with any model there are plus and minus points to weigh. So see what all this means to your e-commerce or m-commerce business, and decide whether it’s the right fit for you.
|1.||Save on physical space
Since you aren’t maintaining the actual goods you don’t need storage space. This is especially useful for products with restricted shelf-lives, like perishable foods that can spoil quickly.
|Lower profit margins
The customer pays you. You pay the drop-shipper. The slim margin between the two transactions is your commission.
Sometimes, when your drop-shipper also sells directly, they become your tangential competition.
|2.||Lower overhead costs
It’s a low risk way for start-ups to dive in because you put less money down and sell more products. You save on packaging, maintaining inventory, equipment, and requiring space to store goods, like warehouses. This also means you don’t require the manpower to take care of the storage spaces. Additionally, you don’t get stuck with unsold products. Drop-shippers can also negotiate better shipping deals given the bulk volume of orders they process each day.
|Low entry barrier = High competition
Since this model makes it so much easier for entry level players, the competition is also stiff, with some markets being more crowded than others. Moreover, in relation to point 1, while you need to mark-up products to be able to gain a profit, you can’t mark it too steep or you will quickly and easily price yourself out of the market. For start-ups who are still developing their brand and smaller less established businesses, to stand out from the crowd you need to do a little market research to get your foot in the door.
|3.||Save time and scale the business quickly
Especially with a growing business, fulfilling orders and shipping on time become difficult to manage. And with fluxes in seasons you need to be able to scale up or down very quickly without getting swamped or incurring loss. Drop-shipping takes care of operations so you can focus on making the business grow.
|Coordinating logistics can be complicated
Chances are you sell a range of products and will be working with more than one drop-shipper. This can become confusing. Policies and shipping methods could vary. And then you need to factor in human error, like mixed up products, damaged goods, delays etc. You need to be equipped with good communication skills and prepared with CRM.
|4.||Validate new products
You need to test the waters to see if introducing a new product will be worth your while. Instead of counting on a gamble and stocking up to the rafters, you can test it with a drop-shipping supplier first. For small businesses it can help immensely with cost margins. But this is great for big businesses, too, when they want to expand their product line quickly and surely. You don’t waste time or capital while still enjoying the luxury of unrestrained experimentation.
|You aren’t in control of quality
You’re trusting a third party with the quality of your products. If they aren’t up to the mark you compromise your brand’s name. Irrespective of where the products come from, the end users, who interact solely with you, see you as the provider. Therefore, bad quality will reflect badly only on you. Moreover, even if you have the budget for it, this model won’t let you personalise much. Which means you lose another precious opportunity to wow your customers or interact with them the way brick-and-mortars do.
So does it really make sense for you?
Yes, drop-shipping is my model!
There is no rule book mostly because markets are fickle and capricious. So it depends on what you want ultimately from your business. If you are new in the e-commerce circuit and don’t want the hassle of big risks this is a relatively low-cost way to get started and to understand roughly how the market works. If you are big and need to expand quickly this model lets you do that without burning you out.
Finding a good drop-shipper:
The list of things that can be drop-shipped are limitless. But doing a due diligence of who works better for what product is important. Someone may be better for art but not so great for electronics. Make sure you know their policies and have these questions answered:
- Does their quality make you proud?
- How do they handle returns or damaged orders?
- How long does it take them to fulfil an order?
- Do they insure orders?
- Do they offer fraud protection?
- Are their costs reasonable?
- Are they white label?
- Is their customer support helpful and responsive?
But before you do any of that, make sure you have sampled their products first and can reliable back it up to your customers!
No, drop-shipping doesn’t work for me!
However, if you want to exercise greater control over your products, mock-ups, customisations, and branding, and have the capacity and manpower capital to handle it on your own, then don’t employ this model just yet. Especially as you become more advanced, the low margins of drop-shipping can become particularly prohibitive. You can always use 3PL to remain hands-off inventory while maintaining a detailed and personalised packaging experience.